Invest

How Can Private Investors Benefit From The Leverage Effect?

Pinterest LinkedIn Tumblr

How Can Private Investors Benefit From The Leverage Effect? It sounds paradoxical, but with increasing debt, the profitability of an investment can be increase. The leverage effect provides information when obligations make sense and how high they can be without affecting profitability. The leverage effect is a term used in finance and describes the leverage effect that debt capital can have on the return on equity. Or to put it simply: the leverage effect describes the extent to which debts can be used for the benefit of economic success. The leverage effect can have a positive as well as a negative impact on the profitability of a company.

Positive Leverage Effect

The increase in profits is plausible because the investors were able to generate profits for themselves with the bank loan. As equity investors, you can keep the difference between 5% interest on borrowed capital (€ 500) and the total return of 10% (€ 1,000) to yourself.


The return on equity ratio (ROE) can be used to check whether external financing is worthwhile. In theory, the more borrowed capital, the higher the return on equity. In practice, however, the return on equity can also turn negative.

Negative Leverage Effect

How strong the leverage effect works (regardless of whether it is positive or negative) depends on the level of debt because by adding a loan, the return on equity shows disproportionately. In the case of a negative leverage effect, this means: the higher a company or investor is in debt; the more disastrous the investment project will be for the equity investor.

Which Factors Favor The Leverage Risk?

Growing interest costs: In practice, expensive borrowing costs increase the risk of leverage. At the same time, high indebtedness and poor creditworthiness pose risks that cause lenders to charge higher interest rates. Therefore, the interest on a loan always rises with the level of debt and leverage effects cannot be increased continuously.


Limited investment opportunities: Even a low return increases the risk of leverage. But it is precisely high returns that go hand in hand with increased risks. Here, too, there is a natural limit for the leverage effect.

How Can Private Investors Take Advantage Of The Leverage Effect?

Business owners or property owners do not only use leverage effects. Suppose you as a private investor would like to benefit from leverage and increase your return on equity. In that case, there are several investment options: Whether you invest in derivatives, companies or real estate – leverage effects can be used with almost any investment object. However, derivatives, in particular, are associated with immense risks and, due to the loans taken out, there may be high obligations to make additional contributions if an investment fails.

Derivatives

Derivative means that it encompasses several different financial products that have one thing in common: They invest indirectly in underlying assets such as stocks or currencies. Some financial constructs among them use leverage effects. Derivatives that equipped with leverage are also known as leverage products.

Write A Comment

  • bitcoinBitcoin (BTC) $ 24,495.00 2.24%
  • ethereumEthereum (ETH) $ 1,985.45 4.67%
  • tetherTether (USDT) $ 1.00 0.11%
  • usd-coinUSD Coin (USDC) $ 1.00 0.11%
  • bnbBNB (BNB) $ 328.40 1.63%
  • cardanoCardano (ADA) $ 0.562368 5.58%
  • xrpXRP (XRP) $ 0.381830 2.02%
  • binance-usdBinance USD (BUSD) $ 0.999227 0.29%
  • solanaSolana (SOL) $ 46.25 7.18%
  • polkadotPolkadot (DOT) $ 9.48 0.79%
  • dogecoinDogecoin (DOGE) $ 0.073429 3.12%
  • avalanche-2Avalanche (AVAX) $ 29.51 1.42%
  • staked-etherLido Staked Ether (STETH) $ 1,932.29 4.62%
  • matic-networkPolygon (MATIC) $ 1.01 9.57%
  • shiba-inuShiba Inu (SHIB) $ 0.000013 1.61%
  • daiDai (DAI) $ 0.999767 0.07%
  • tronTRON (TRX) $ 0.069992 0.03%
  • ethereum-classicEthereum Classic (ETC) $ 44.28 4%
  • wrapped-bitcoinWrapped Bitcoin (WBTC) $ 24,490.00 2.31%
  • okbOKB (OKB) $ 21.97 4.94%
  • litecoinLitecoin (LTC) $ 64.29 4.08%
  • leo-tokenLEO Token (LEO) $ 4.89 1.87%
  • nearNEAR Protocol (NEAR) $ 5.89 0.67%
  • chainlinkChainlink (LINK) $ 9.16 1.92%
  • ftx-tokenFTX (FTT) $ 31.49 2.65%
  • uniswapUniswap (UNI) $ 9.04 0.01%
  • crypto-com-chainCronos (CRO) $ 0.155122 1.44%
  • cosmosCosmos Hub (ATOM) $ 12.09 2.29%
  • stellarStellar (XLM) $ 0.127426 2.03%
  • flowFlow (FLOW) $ 2.95 0.56%
  • moneroMonero (XMR) $ 166.52 2.12%
  • bitcoin-cashBitcoin Cash (BCH) $ 144.42 2.66%
  • algorandAlgorand (ALGO) $ 0.371356 2.65%
  • vechainVeChain (VET) $ 0.033067 0.01%
  • filecoinFilecoin (FIL) $ 8.55 1.22%
  • apecoinApeCoin (APE) $ 6.87 0.14%
  • internet-computerInternet Computer (ICP) $ 8.27 0.66%
  • decentralandDecentraland (MANA) $ 1.07 1.74%
  • hedera-hashgraphHedera (HBAR) $ 0.082709 1.11%
  • chain-2Chain (XCN) $ 0.087195 0.11%
  • axie-infinityAxie Infinity (AXS) $ 19.46 6.01%
  • the-sandboxThe Sandbox (SAND) $ 1.34 2.24%
  • tezosTezos (XTZ) $ 1.92 0.83%
  • quant-networkQuant (QNT) $ 127.31 2.27%
  • lido-daoLido DAO (LDO) $ 2.95 13.87%
  • theta-tokenTheta Network (THETA) $ 1.60 0.33%
  • aaveAave (AAVE) $ 110.72 0.61%
  • celsius-degree-tokenCelsius Network (CEL) $ 3.60 51.05%
  • elrond-erd-2Elrond (EGLD) $ 66.26 2.2%
  • fraxFrax (FRAX) $ 0.998541 0.21%